ESTATE PLANNING

What is estate planning?
Estate planning is the process of preparing a systematic strategy for the best possible use of your assets during your lifetime (financial planning) and then transferring those assets after you pass away (estate planning).   This process must take into consideration your current financial plan, your future needs and your estate plan.

What is my estate?
Your estate is everything you own - your home, real estate, personal possessions, bank accounts, stocks, bonds, business interests, life insurance, IRAs, retirement plans, and other financial interests.

I have a will. Do I have an estate plan?
Planning usually includes a will, but it is rarely as simple as just having a will.   Many people make the mistake of thinking that if they have a will, they have an estate plan.   This is rarely the case and frequently leads to significant estate planning problems.   The most important consideration in estate planning is identifying and achieving your goals, both during your lifetime and after you pass away.   Estate planning also includes smart tax planning since estate taxes (both state and federal) can significantly cut into the wealth you want to leave to your beneficiaries.   The state and federal government try to levy the highest possible estate taxes.   So, before you pass away, you should take measures to keep your estate tax bill as low as possible.

What are estate taxes?
The federal government and the states reserve the right to tax assets owned by people when they die, before their heirs are permitted to enjoy those assets.   While rates vary from state to state, some states do not have such taxes.   The federal government imposes tax on estates greater than $2,000,000 that do not pass directly to the person's spouse.

What is the current federal estate tax exemption?

Note:   This table reflects the current law under The Economic Growth and Tax Relief Reconciliation Act of 2001.   The estate tax is scheduled to be repealed in 2010, but under current law returns in 2011 with the exemption amount reinstated at $1 Million dollars, with highest tax rate at 55%.   It is anticipated that this law will be changed before it becomes fully effective.

How much are federal estate taxes?
The federal estate tax rate is 46% in 2006 and decreases to 45% in 2007 and 2008. Here are some federal estate tax bills after allowances, deductions and the exemption have been taken:

Planning ahead and making use of tax-reducing strategies, such as including tax-planning provisions in a Living Trust will allow a married couple to fully utilize two federal estate tax exemptions.   This will increase the amount of the estate that can pass tax-free to beneficiaries to $4,000,000 in 2006.   This type of planning for many people can result in reduced estate taxes or complete elimination of estate taxes.

Who pays estate taxes?
The executor or the administrator of an estate pays estate taxes before the heirs receive their money.   There is one major exception: a U.S. citizen can leave all assets to his or her spouse without having to pay federal estate taxes by using the unlimited marital deduction.   If your estate is sizeable, leaving it to your spouse can create even larger estate problems when your spouse dies.

Can I leave my estate to my children or grandchildren?
If your estate is left to anyone other than your spouse, an amount equal to the federal estate tax credit can be passed at death free of federal estate taxes, as long as you have not used this credit during your lifetime.   Once you exceed this amount, your estate would be subject to federal estate taxes before passing the property to your heirs.   In addition, your grandchildren could be subject to a generation skipping tax.

Can I give away assets during my lifetime?
Giving away some assets while you are living can be a good idea for some people.   But first and foremost, make sure your needs are met before giving assets away.   If you give assets away, keep some important rules in mind.   You and your spouse may give $12,000* per year to each child or grandchild with no federal gift tax consequences.   Together, you could give one $24,000 gift per year to each child or grandchild and pay no gift tax.   This amount would not count against your lifetime $1,000,000 gift credit.   Giving amounts larger than $12,000 would count against your tax credit.

* The dollar amount that you may give as a tax-free gift is now tied to inflation and may increase every few years.

Can I give money to charity?
Yes...In addition to helping a charity, you can gain valuable income tax deductions by giving to charity.   In fact, if you implement the proper estate plan using special trusts, you may be able to give money to charity, provide money for your children and come out ahead on both your income tax bill and your estate tax bill.

How are the Estate taxes paid?
Nine months after a person dies, estate taxes are due.   Your executor could be forced to auction a family heirloom, part with stocks you wanted to keep in the family, liquidate business assets, sell property at a reduced price, expend cash needed for liquidity, or borrow money to pay estate taxes.   This can be avoided if you decide where the money will come from before you pass away. Some people pre-fund estate taxes by establishing a trust account.   Such a trust may hold various assets, such as a life insurance policy that will provide cash when it's needed - when you pass away.

Can I do my own plan?
Estate planning can become very complex and is not a job for amateurs.   If you have more than $600,000 in assets, or are likely to accumulate more than $600,000 during your lifetime, experts should certainly do your estate planning.   There are many states where smaller estates still need specialized planning due to state taxes.   There are other situations, such as second marriage, out of state property, special needs for beneficiaries, professional asset management, and many others that can cause even a very small estate to benefit from good planning.   You'll want to consult with someone who specializes in this field.   Estate planning can require the services of an attorney, accountant, insurance professional and/or banker as well as you and any family members you want involved.   Estate planning documents can include wills, living or testamentary trusts, powers of attorney, health care directives, nomination of conservator, appointment of guardian and specialized trust documents to reduce tax liabilities.   NOT A DO IT YOURSELF JOB!

What steps should I take?

1. Gather the information and documents necessary to properly prepare a plan such as wills, trusts, insurance policies, tax returns and other financial data.   Discuss and write down the objectives that you want to see fulfilled after your death.   (Who is to receive the family heirlooms?   Are there children in your family that have special needs?   Do you want assets to be held in trust for your grandchildren's education?   Do you desire to leave assets to charitable organizations?)
2. Seek professional analysis of your information so that a strategy can be developed and a plan can be drafted.
3. Implement the plan with the guidance of your estate planner and estate planning team.
4. Review your plan every year and make changes when necessary.

How do I get started?
Start with a professional or organization that has the knowledge and ability to work with allied professionals to develop and implement your plan.   Southern Financial Services brings together a staff of qualified professionals with legal, tax, accounting, insurance, financial and estate planning experience.   They are familiar with the legal and financial issues involved in estate planning and can help you to develop and implement your plan.